Will nothing brake this market?! Will nothing brake this market?! http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\traffic-light-close-up-small.jpg August 27 2021 August 27 2021

Will nothing brake this market?!

'Buy the dips' continues to be the prevailing philosophy.

Published August 27 2021
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Afghanistan and rising geopolitical risks? Markets were trading higher at this writing. A surging delta variant? It has slowed office re-openings, travel and entertainment but the hits to the broader economy appear limited. Supply shortages? They’re creating headaches all over (see next paragraph) but the global economy is working through them—global trade just had a record quarter, and Goldman Sachs expects Q3 GDP growth to top Q2 and remain strong through year-end. Last week’s 3% retreat on a confluence of scares—delta, the troubled Afghanistan withdrawal, Fed indications taper is just around the corner—was over in days, with the market moving on to more new highs. In fact, Chair Powell’s Jackson Hole comments this morning affirming taper is all but certain this year sent stocks higher. The “buy the dip” mentality is pervasive, fueled by a flood of new retail investors and, of course, earnings. After a blowout Q2—revenue beat expectations by the most on record, and earnings rose by double digits (16.9%) for an unprecedented fifth straight quarter—earning revisions keep melting up and analysts can’t keep up. All of this, along with easy money (taper hasn’t even started, and futures don’t see the first Fed hike until late 2022 at the earliest) and more fiscal trillions on the way (more in the third paragraph) trounce whatever you’re worrying about.

Shortages, and their consequences, are everywhere. With farmers vying for supply, fertilizer prices have shot to a 9-year high. A Winston-Salem restaurant is paying $200 more a week for mayonnaise. Asian manufacturers are bidding for space on cargo ships, and a local manufacturer told TIS Group that goods that arrive at U.S. shores cost $30,000 to ship from West Coast ports to mid-America—five times more than in 2020. Unable to find enough semiconductor chips, Toyota slashed September production 40% and U.K. car production fell to 1956 levels. When they do find chips, they’re paying up—the world’s largest contract chip maker this week said it’s raising prices 10-to-20%. Even blue-ribbon customers that long enjoyed first call on producers’ supplies are getting pinched. Microsoft is short of chips for its Xbox game consoles and Apple says the lack of low-end chips has crimped flagship smartphones and tablet sales. Better shop early for Christmas! Elsewhere, the lack of supply keeps pushing home prices to new records (more below), and the struggle to find workers across many industries has wages rising at nearly double their 14-year average. Only three people showed up for an online Albuquerque public safety job fair despite a $15K sign-on bonus for police and fire positions. Producers can only pass on so much of these rising costs. A worry for another day as profit margins are at new record highs.

House Speaker Pelosi is masterful in controlling her caucus. Even though moderate Dems forced a late-September vote on the $1 trillion bipartisan infrastructure package, Evercore ISI thinks odds of passage of the more contentious budget reconciliation bill haven’t changed and remain above 50-50. If anything, the Afghanistan disaster may improve the odds. With surveys showing President Biden’s favorability plunging, even among his party and allies overseas, Dems desperately need a victory heading into midterms. Consensus among my D.C. sources thinks the $3.5 trillion “social” infrastructure package will end up closer to $2 trillion, with more moderate tax increases on high-earners and corporations as partial offsets. Much of the “hard’” infrastructure spending would be spread over 10 years, with the “social” spending coming in strong next year (just in time for the midterms). So, next month promises to be messy as reconciliation, bipartisan infrastructure and the debt ceiling are all on the docket. Pessimistic pundits reason that a new regime Fed willing to live with higher inflation in its quest for more inclusive employment and a Dem Congress on its way toward approving $5 trillion in new spending in less than a year will bring problematic inflation that entire generations have never experienced. That would brake (or even break) the market. Meantime, it is dangerous to be a bear.


  • Build it and they will buy New home sales surprised, rising above consensus as July inventories improved (the stock of unsold homes increased 5.5%). Existing sales also rose versus expectations for a decline amid increases in supply. Buyers still face sticker shock: median new home prices hit another record high and year-over-year (y/y) median existing home prices have risen 113 straight months.
  • The historic boom isn’t just stimulus-driven consumption It’s capex, too. New orders for non-defense capital goods (ex-aircraft) eked out a new all-time high in July, on top of a what is already more than a year-long moonshot. Overall durable goods orders dipped in July, but new orders after excluding volatile transportation were strong, and shipments rose quickly and broadly.
  • Peak inflation? From your lips … Headline and core y/y PCE prices rose in July at their fastest pace in 30 years. However, both reflected some signs of moderation, as the month-over-month increases slowed.


  • Consumers chill … Household spending slowed in July off a strong and upwardly revised June, with spending shifting to services as Americans hit the road for vacay. The biggest expenditure increases went to food services and accommodations; spending on goods declined, led by cars and related parts. July still marked a fifth straight month of increased spending on incomes bolstered by stimulus and jobs.
  • … and not particularly happy The stunning drop in consumer sentiment in the University of Michigan’s initial read for August held, with the final take on the month representing the weakest reading in more than a decade. Declining expectations drove the drop, as the variant surge and higher inflation weighed on consumers.
  • August lull Led by decelerating services activity, Markit’s initial take on August saw its composite PMI drop a third straight month and more than expected to its lowest reading since last December. Regional gauges also reflected some slowing, although all remained firmly in expansion territory.

What else

The bond market is an excellent forecaster Even with the rise in delta variant cases and a gradual fiscal cliff as Covid stimulus fades, neither the Treasury nor credit markets have priced a material risk of a recession within the next year. In fact, investment grade and high-yield corporate yields suggest real GDP growth should be around 4% next year and earnings-per-share growth nearly 9%.

Another front in the U.S.-China Cold War By 2025, China will produce twice as many science, technology, engineering and mathematics doctorates as the U.S. does, and on average its scientists now earn more than those in Europe. The U.S. still dominates frontier basic research, but China is closing the gap.

Joe is a thorn in Joe’s side U.S. Sen. Joe Manchin, critical to whatever Joe Biden and the Dems do, is now suggesting the coal industry so vital to his home state of West Virginia must be saved. He’s pushing for so-called carbon capture technology to offset the polluting effects of burning coal and says the pollution issue must be aimed squarely at Asia (read China). His stance, TIS observes, marks another trigger point between centrist and progressive Democrats as they try to agree on reconciliation.

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Tags Equity . Markets/Economy . Politics .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

High-yield, lower-rated securities generally entail greater market, credit/default and liquidity risks, and may be more volatile than investment grade securities.

Personal Consumption Expenditure (PCE) Index: A measure of inflation at the consumer level.

Stocks are subject to risks and fluctuate in value.

The Markit Composite PMI is a gauge of manufacturing and service activity in a country.

The University of Michigan Consumer Sentiment Index is a measure of consumer confidence based on a monthly telephone survey by the University of Michigan that gathers information on consumer expectations regarding the overall economy.

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